La era de la desigualdad (¿consecuencia directa del "imperialismo monetario"?) – Parte III (página 2)

Both tax and expenditure policies need to be
carefully designed to balance distributional and efficiency
objectives, including during fiscal consolidation. The
appropriate mix of instruments will depend on administrative
capacity, as well as on society"s preferences for redistribution,
the role envisaged for the state, and political economy
considerations. Options for redistributive policies that help
minimize efficiency costs, in terms of their effects on
incentives to work and save, are the following:

? In advanced economies: (i) using means-testing, with a
gradual phasing out of benefits as incomes rise to avoid adverse
effects on employment; (ii) raising retirement ages in pension
systems, with adequate provisions for the poor whose life
expectancy could be shorter; (iii) improving the access of
lower-income groups to higher education and maintaining access to
health services; (iv) implementing progressive personal income
tax (PIT) rate structures; and (v) reducing regressive tax
exemptions.

? In developing economies: (i) consolidating social
assistance programs and improving targeting; (ii) introducing and
expanding conditional cash transfer programs as administrative
capacity improves; (iii) expanding noncontributory means-tested
social pensions; (iv) improving access of low-income families to
education and health services; and (v) expanding coverage of the
PIT. Innovative approaches, such as the greater use of taxes on
property and energy (such as carbon taxes) could also be
considered in both advanced and developing economies.

Introduction

1. Income inequality has increased in both advanced
and developing economies in recent decades. Increasing
inequality has been attributed to a range of factors, including
the globalization and liberalization of factor and product
markets; skill-biased technological change; increases in labor
force participation by low-skilled workers; declining top
marginal income tax rates; increasing bargaining power of high
earners; and the growing share of high-income couples and
single-parent households (OECD, 2008; Alvaredo and others, 2013;
Hoeller, Joumard, and Koske, 2014). Many of these developments
have had beneficial effects on growth and poverty reduction both
nationally and globally (Chen and Ravallion, 2010; Milanovic,
2012).

2. There is growing evidence that high income
inequality can be detrimental to achieving macroeconomic
stability and growth. Recent empirical work finds that high
levels of inequality are harmful for the pace and sustainability
of growth (Ostry, Berg, and Tsangarides, forthcoming). Others
have argued that rising inequality may have been an important
contributing factor to the global financial crisis. Moreover,
evidence from public surveys in various countries indicates that
widening income inequality has been accompanied by growing public
demand for income redistribution, especially in countries most
strongly affected by the crisis. This comes at a time when high
public debt ratios in the advanced economies, and emerging
vulnerabilities in the developing economies, have made fiscal
restraint an important priority, and point to the importance of
sensitivity to distributional concerns in designing consolidation
packages. In this light, income inequality can be of
macroeconomic concern for country authorities, and the Fund
should accordingly seek to understand the macroeconomic effects
of inequality. In addition, in its policy advice, the Fund should
be mindful of how macroeconomic policies (including fiscal
policies) affect income distribution and their consistency with
the distributional goals of country authorities.

3. Fiscal policy is the primary tool for governments
to affect income distribution. Fiscal policy has three main
objectives -to support macroeconomic stability, provide public
goods and correct market failures, and redistribute income. Both
tax and spending policies can alter the distribution of income,
both over the short and medium term. For example, in-kind
benefits, such as education spending, can affect the inequality
of market incomes (i.e., incomes before taxes and transfers)
through their impact on future earnings. Other fiscal
instruments, such as income taxes and cash transfers, can reduce
the inequality of disposable incomes (i.e., incomes after direct
taxes and transfers), including indirectly via their impact on
market incomes due to work and savings responses.

4. The Fund has long recognized the nexus between
income distribution and fiscal policy. In the late 1980s
there was growing recognition and discussion of the potential
effects of macroeconomic and structural adjustment programs on
poverty and inequality, including by the IMF"s Executive Board
(IMF, 1995). These discussions highlighted the importance of
social safety nets to protect the poor and safeguard their access
to essential public services, such as primary education and
healthcare. Guidance notes from management on how income
distribution and social expenditures should be addressed by
staff, in the context of the Fund"s mandate, were issued in the
mid-1990s (IMF, 1996, 1997). The Fund also expanded its
analytical work in this area, drawing on contributions from
leading academics (Tanzi and Chu, 1998; Tanzi, Chu, and Gupta,
1999). The growing attention of the Fund to the impact of fiscal
policy on the poor was also reflected in the creation of the
Poverty Reduction and Growth Facility (later PRGT) in the late
1990s, which emphasized the importance of pro-poor government
budgets. More recently, the work on fiscal policy and equity was
revived (Bastagli, Coady, and Gupta, 2012) and subsequently
broadened to cover jobs and growth; a guidance note on the latter
was issued to Fund staff (IMF, 2013a). The macroeconomic gains
from greater gender equity, and fiscal policies to help achieve
this, have also been addressed in recent work (Elborgh-Woytek and
others, 2013).

5. Against the background of recent trends in income
distribution and experience with the use of redistributive fiscal
instruments in both advanced and developing economies, this paper
explores how a society"s distributional objectives can be
achieved in the most efficient manner. Redistributive fiscal
policies can affect private decisions in various ways, including
decisions to seek employment, to increase labor effort, and to
save and invest. These, in turn, can potentially affect both the
level and growth of economic activity, either positively and
negatively. Given the Fund"s mandate to promote growth and
stability, it is important that the potential tradeoffs or
complementarities between fiscal redistribution and growth are
well understood. In particular, there is a need to identify
fiscal instruments that achieve distributional objectives at a
minimum cost to economic efficiency. In doing so, the paper draws
extensively on country experience, as discussed in the
literature, as well as in IMF technical assistance reports. The
paper also discusses how fiscal policies can protect households
from poverty.

6. This paper does not advocate any particular
redistributive goal or policy instrument for fiscal
redistribution. The motivation for the paper is to provide
guidance to policymakers on options to achieve their desired
level of redistribution in the most efficient manner. The paper
does not provide guidance on the optimal degree of fiscal
redistribution, which is country-specific and depends, among
other factors, on preferences for the role of the state and the
costs involved in meeting goals for
redistribution…

7. The structure of the paper is as follows. The
next section describes trends in inequality across advanced and
developing economies. The discussion covers inequality of incomes
and wealth. It also examines the evidence on the persistence of
income inequality across generations, an indicator of equality of
opportunity. This is followed by a review of empirical evidence
on the redistributive impact of fiscal policies and the extent to
which fiscal policy can explain differences in inequality across
countries and over time. The paper next focuses on the overall
design of redistributive fiscal policy as well as of specific tax
and spending instruments, and how these can be designed to
minimize the efficiency costs of redistribution. The final
section discusses the redistributive impact of fiscal
consolidation, which can affect inequality both in the long run
through channels explained in earlier sections and through its
short-run effects on output and employment.

Trends in inequality

8. Economic inequality can be viewed from different
perspectives. Each of these can provide insights into the
nature, causes, and consequences of economic
inequality.

? Inequality of income: This focuses on the
inter-personal distribution of income, which captures how
individual or household incomes are distributed across the
population at a point in time.

? Inequality of wealth: Here the focus is on
the distribution of wealth across individuals or households,
which reflects differences in savings as well as bequests and
inheritances.

? Lifetime inequality: This focuses on
measuring inequality in incomes or earnings for an individual
over his or her lifetime, rather than for a single
year.

? Inequality of opportunity: This focuses on
the relationship between income inequality and social mobility,
in particular the extent of mobility between income groups across
generations.

A. Inequality of Income

9. Over the last three decades, inequality in the
personal distribution of income has increased in most
economies. Figure 1 presents trends in the average
(unweighted) Gini coefficient for disposable incomes (i.e.,
market incomes minus direct taxes plus cash transfers) across
regions over recent decades -which reflects both the inequality
of market-determined incomes as well as the distributional impact
of income taxes and public transfers. The Gini coefficient ranges
between 0 (denoting complete equality) and 1 (denoting complete
inequality). Between 1990 and 2010, the Gini for disposable
income has increased in nearly all advanced and emerging European
economies. Over one-third of advanced economies and half of
emerging Europe experienced increases in their Ginis exceeding 3
percentage points, with most of the increases in emerging Europe
occurring between 1990 and 1995 during the early years of their
transition to market-based systems. Inequality also rose in most
economies in Asia and the Pacific and in Middle East and North
Africa. While average inequality fell in sub-Saharan Africa over
this period, it still rose by more than 3 percentage points in
more than one-fourth of these economies. Inequality also
increased in over one-third of the economies in Latin America,
although on average there was a slight decline. However, since
2000 there has been a substantial decline in the Gini in nearly
all countries in this region. This increase in inequality across
the globe has also been accompanied by a widespread rise in
public support for redistribution.

Note: Disposable income is income available
to finance consumption once income taxes and public transfers
have been netted out. Therefore, the distributional impacts of
indirect taxes and in-kind transfers are not included. The Gini
coefficient ranges between 0 (complete equality) and 1 (complete
inequality). Number of countries in parentheses.

10. More striking than changes in inequality within
regions are the persistent differences across regions. For
instance, between 1990 and 2010, average inequality in each
region changed by less than 3¼ percentage points. In
contrast, average inequality in the two most unequal regions
(sub-Saharan Africa and Latin America) remained 12 percentage
points higher than the two most equal regions (emerging Europe
and advanced economies). As the following section shows, a large
proportion of the differences in regional average disposable
income inequalities can be explained by differences in fiscal
policies, especially in the levels and composition of taxes and
spending.

11. More recently, the public debate has focused on
the sharp increase in the share of total income going to top
income groups. Over the last three decades the market income
shares of the richest one-percent of the population have
increased substantially in English-speaking advanced economies,
as well as in China and India (Figure 2). For example, in the
United States, the share of market income captured by the richest
10 percent surged from around 30 percent in 1980 to 48 percent by
2012, while the share of the richest one-percent increased from 8
percent to 19 percent. Even more striking is the fourfold
increase in the income share of the richest 0.1 percent, from 2.6
percent to 10.4 percent. There has been substantial variation
across countries in how much the share of the highest income
groups has risen. The increase in the share of the top
one-percent has been much less pronounced in Southern European
and Nordic economies, and hardly any increases have been observed
in continental Europe and Japan. While there is broad consensus
about these trends, there is much less consensus on the factors
driving them. Some emphasize the impact of new technologies and
globalization on the supply and demand for skills (e.g., Goldin
and Katz, 2008; Mankiw, 2013) -which can be expected to affect
all economies- while others have highlighted the role of policy
choices, such as reductions in top income tax rates. Rent-seeking
behavior of top executives (at the expense of other incomes) and
wealth accumulation have also been identified as factors behind
the rising share at the top (see Stiglitz, 2012; Alvaredo and
others, 2013)…

B. Inequality of Wealth

13. In advanced economies, household net wealth
-financial assets and real estate minus debt- has increased
substantially over the last four decades. Assessment of
trends in this area requires caution, given the limited number of
economies with comprehensive data. Internationally comparable
data for eight large advanced economies show that the average
ratio of net household wealth to national income grew by almost
80 percent between 1970 and 2010 (Piketty and Zucman, 2013). The
largest increase was observed in Italy (by 180 percent) and the
smallest increase was in the United States (by 21 percent).
Explanations for the rapid growth in wealth include asset-price
booms and a significant increase in private savings.

14. Wealth is more unequally distributed than
income. The Gini coefficient of wealth in a sample of 26
advanced and developing economies in the early 2000s was 0.68,
compared to a Gini of 0.36 for disposable incomes (Figure 4). The
share of wealth held by the top 10 percent ranges from slightly
less than half in Chile, China, Italy, Japan, Spain, and the
United Kingdom, to more than two-thirds in Indonesia, Norway,
Sweden, Switzerland, and the United States. In Switzerland and
the United States, where wealth is most unequally distributed,
the top one-percent alone holds more than one-third of total
household wealth.

15. The inequality of wealth has risen in recent
decades in several advanced economies. For instance, between
the mid-1980s and early-2000s, the growth of wealth in Canada and
Sweden was all concentrated in the two upper deciles of the
wealth distribution. During the same period, the Gini
coefficients of wealth distribution in Finland and Italy rose
from around 0.55 to above 0.6. In the United States, the Gini
coefficient of wealth distribution rose from 0.80 in the
early-1980s to almost 0.84 in 2007.

16. Non-financial assets represent a large share of
household wealth. Survey data suggest that non-financial
assets -such as primary residences and other real
estate-represent between 70 and 90 percent of total household
gross wealth in advanced economies. In developing economies, this
share is even larger: e.g., in the early 2000s it exceeded 90
percent in India and Indonesia (Davies and others, 2008).
Financial wealth is generally more unequally distributed than
real estate: for example, Fredriksen (2012) reports that the Gini
coefficient for financial wealth (on average 0.8 for a group of
seven advanced countries) exceeds that for non-financial wealth
(0.63).

C. Lifetime Inequality

17. Empirical studies suggest that lifetime
inequality is usually lower than inequality in any given
year. This occurs for two reasons. First, in many economies,
individuals experience significant fluctuations in incomes from
year to year. Because of this, an individual who has relatively
high income in one year may not necessarily have high incomes
over their entire lifetime, relative to his or her peers of the
same age. Bowlus and Robin (2012) find that because of this
"earnings mobility" from one year to the next, the lifetime
inequality of income is about 20-30 percent lower than annual
income inequality in Canada, the United Kingdom, and the United
States. In France and

Germany, lifetime inequality is similar to that of
annual income. Second, lifetime incomes also tend to be less
unequal because of the age-income cycle that affects the entire
population: incomes tend to be lower during early working years
and peak in later years, before declining again (Paglin, 1975).
Taking both of these factors into account, Björklund (1993)
finds that the dispersion of lifetime income in Sweden is about
35-40 percent lower than that of annual income. The concept of
lifetime income inequality is also important for assessing the
redistributive effects of social insurance contributions and
benefits.

D. Inequality of Opportunity

18. Income inequality can persist across generations,
reflecting differences in economic opportunity. Restricted
opportunities for increasing incomes can reflect a range of
factors, including lack of access to education (including early
childhood and tertiary education) and lack of access to certain
professions or business opportunities (OECD, 2011a; Corak, 2013).
This lack of access is in turn reinforced by low incomes.
Therefore, high income inequality is both a symptom and a cause
of low economic mobility, and family background is a key factor
in determining the adult outcomes of younger
generations.

19. Intergenerational income mobility is lower in
countries with higher income inequality. Intergenerational
earnings mobility, as measured by the elasticity between a
parent"s and an offspring"s earnings, is low in countries such as
Italy, the United Kingdom and the United States, which have high
Gini coefficients for disposable income. In contrast, mobility is
much higher in the more egalitarian Nordic countries (Figure 5).
This relationship between income inequality and intergenerational
mobility is often referred to as the "Great Gatsby Curve"
(Krueger, 2012). In low-mobility countries, about 50 percent of
any economic advantage that a father has is passed onto his
offspring, whereas in high-mobility countries this falls to less
than 20 percent. Evidence for Nordic countries finds that
intergenerational income mobility is flat across much of the
parental income distribution but rises at the top end. In
developing economies with available data, income mobility is
extremely low, especially in the high inequality economies of
Latin America.

Note: The intergenerational earnings elasticity
estimates in the chart are the elasticity between a father"s
income and a son"s income. The upward slope of the line suggests
that countries with a high inequality of income around 1985 (high
Gini coefficients) had high intergenerational earnings
elasticities. A high elasticity suggests a strong relationship
between a father and son"s income and less mobility of incomes
across generations.

Fiscal Redistribution

20. Evaluating the redistributive impact of fiscal
policies requires a comparison of incomes after taxes and
transfers with those that would exist without them. In
principle, assessments of the incidence of fiscal policies should
incorporate information on consumers" and producers" behavioral
responses to taxes and transfers and their impact on market
incomes. In practice, most studies do not incorporate this
aspect, since sufficient data on behavioral responses are often
unavailable. In these studies, the incidence of commodity taxes
is typically assumed to fall on consumers, factor taxes are
assumed to fall on factor suppliers (labor and capital), and
transfers to beneficiaries do not lead to changes in factor
supplies. The evidence below is drawn from such studies. In
econometric studies, on the other hand, behavioral responses are
captured…

A. Advanced Economies

21. Fiscal policy has played a significant role in
reducing income inequality in advanced economies, with most of
this reduction being achieved on the expenditure side through
transfers. Over recent decades, direct income taxes and
transfers have decreased inequality in advanced economies by an
average of one-third (Figure 6). For instance, in 2005, the
average Gini for disposable income was 14 percentage points below
that of the average market income Gini. The redistributive impact
of transfers accounts for about two-thirds of the decrease in the
Gini. Within transfers, non-means-tested transfers (including
public pensions and family benefits) account for the bulk of the
redistribution (Immervoll and others, 2005; Paulus and others,
2009). On the tax side, personal income taxes make an important
contribution to reducing inequality in a number of economies -in
fact, in most economies, the redistribution achieved through
income taxes is even higher than for means-tested
transfers.

Note: The impact on inequality of disposable income does
not incorporate the redistributive impact of indirect taxes and
in-kind benefits.

22. Social insurance and other transfers are far less
redistributive when examined from the perspective of lifetime
income. Pension systems, for example, redistribute income
across an individual"s own lifetime, with pension contributions
being made during peak earning years, and benefits received
during retirement when incomes are lower. Similarly, households
receive more in transfers when they have children. The fiscal
redistribution of incomes from the lifetime rich to the lifetime
poor is thus smaller than that implied by a snapshot in any one
year. For instance, Bovenberg, Hansen, and Sorenson (2012) show
that about three-fourths of redistribution in Denmark involves
redistribution over peoples" lifecycle as opposed to
redistribution from lifetime rich to lifetime poor -they also
report similar magnitudes for Australia, Ireland, Italy, and
Sweden from other studies.

23. Reductions in the generosity of benefits and less
progressive taxation have decreased the redistributive impact of
fiscal policy since the mid-1990s. Between the mid-1980s and
mid- 1990s, the Gini coefficient for market income increased by
3.1 percentage points, while that for disposable income increased
by only 1.1 points (Figure 7). Therefore, fiscal policy offset
about two-thirds of the increase in market income inequality over
this period. Over the subsequent decade (mid-1990s to mid-2000s),
market income inequality increased by a further 2.2 percentage
points while disposable income inequality increased by 1.8
percentage points. Therefore, while market income inequality
increased by less than over the previous decade, disposable
income inequality actually increased by more. As a result, during
the two decades from the mid-1980s to the mid-2000s, fiscal
policy offset less than half of the increase. In the absence of
policy changes, the absolute distributive impact of fiscal policy
would have been higher (and the increase in disposable income
inequality lower) than observed over the second decade. This is
the case because a progressive tax and benefit systems tends to
redistribute income even more when market inequality rises (e.g.,
due to unemployment or rising incomes of top earners). The
decrease in the redistributive power of fiscal policy has been
attributed to fiscal reforms in many economies since the
mid-1990s that have reduced the generosity of unemployment and
social assistance benefits as well as income tax rates,
especially at higher income levels (OECD, 2011a).

24. The evidence on the effects of reductions in
corporate income taxes on inequality is mixed. In theory, the
impact of corporate taxes on wages and capital income over the
long run depends on the relative mobility of capital and labor
across both sectors and countries (Auerbach, 2006). Where capital
is more internationally mobile, the incidence of corporate taxes
will tend to fall on wages to the extent that labor is immobile,
with this impact being reduced when the home country is large
enough to affect the international rate of return on capital.
However, the taxation of "rents" (i.e., above normal profits) is
still likely to fall on owners of capital. Recent empirical
evidence on the long-run incidence of corporate taxes suggests
that between 45 and 75 percent of the corporate tax burden falls
on wages (Gentry, 2007; Arulampalam, Devereux, and Maffini,
2010). Since wage earners typically have lower mean incomes than
those with capital income, corporate income taxes may not be as
progressive over the longer term as is often believed.

25. The overall redistributive impact of fiscal
policy is also influenced by the distribution of indirect taxes
and in-kind transfers. Empirical evidence suggests that
indirect taxes tend to be regressive or proportional to incomes
(O"Donoaghue, Baldini, and Mantovani, 2004; Cnossen, 2005). While
both the value-added tax (VAT) and excise duties are found to be
regressive, excise taxes are especially regressive. However, the
regressivity of indirect taxes is typically much smaller when
assessed against lifetime income or consumption. In-kind
transfers such as education and health spending are very
progressively distributed (i.e., their benefits are more equally
distributed than disposable incomes). On average, in-kind
transfers are found to decrease the Gini coefficient by 5.8
percentage points in five European economies (Belgium, Germany,
Greece, Italy, and the United Kingdom), with health (3.6 points)
and education (2.2 points) accounting for virtually all of this
impact (Paulus, Sutherland, and Tsakloglou, 2009). In addition,
expansion of access at lower levels can decrease earnings
inequality in the medium term (De Gregorio and Lee,
2002)…

Recomendaciones

Design of efficient redistributive fiscal
policy

A. Conceptual Framework

30. This section discusses how fiscal policy can
contribute to achieving distributional objectives at minimum
efficiency cost. As highlighted earlier, while there is broad
consensus regarding recent trends in income inequality, there is
less consensus regarding the forces driving these trends -for
example, whether its reflects inefficient rent seeking or
efficient market rewards for increasing productivity- or on the
policy implications for countries. However, there is clear
evidence of rising popular support for redistribution from public
attitude surveys in advanced and developing economies.

31. Redistributive fiscal policy should be consistent
with an appropriate level and composition of public spending and
fiscal sustainability. In theory, the optimal level of
spending is where the marginal social benefit of spending equals
the marginal social cost of financing this spending. Since this
applies to each category of spending, for a given source of
financing, the marginal social benefit of spending should also be
equal across spending categories. These considerations have three
implications. First, the optimal level of redistributive spending
will vary from country to country, as it depends on preference
and costs (including the efficiency costs of taxation). Second,
the benefits from additional spending on redistribution should be
compared with the benefits of raising outlays in other areas,
such as public infrastructure to support higher growth. Third,
redistributive fiscal policy should be consistent with fiscal
sustainability, which can support economic growth and the
capacity to finance higher spending on redistribution over the
longer term.

32. Fiscal redistribution can usually most
efficiently be achieved through direct instruments that tax or
provide benefits based on income. Fiscal redistribution, by
its very nature, involves transferring resources from
higher-income to lower-income households through taxes and
transfers. On the tax side, personal income taxes, for example,
are often preferable for achieving redistribution than taxes on
consumption because they directly take account of the ability of
households or individuals to pay. On the spending side, cash
transfers to poor households are usually superior to indirect
methods such as price subsidies. Better targeting of transfers
reduces their fiscal cost and the tax levels required to finance
them, thus achieving distributional objectives in a more
efficient manner. Targeting, however, is not without efficiency
costs and must be designed carefully.

33. The impact of tax and expenditure policies on
redistribution should be evaluated jointly. Although both
taxes and spending can have redistributive implications, the
trade-off between efficiency and redistribution will usually
differ. Therefore, where the efficiency cost of redistribution
through taxes is relatively large, this suggests that these taxes
should focus on raising revenue to finance other redistributive
instruments. For instance, an increase in regressive taxes can
still be the best approach to supporting redistribution if the
public expenditures they finance are highly
progressive.

34. Both tax and expenditure policies need to be
carefully designed to balance distributional and efficiency
objectives. These can be designed to minimize efficiency
costs (in terms of effects on incentives to work and save)
through applying the following principles:

? Use means-tested cash transfers where possible
while minimizing adverse labor market incentives.
Means-tested programs restrict eligibility or benefit levels
according to income and can thus achieve redistributive
objectives at a lower cost than benefits provided to the entire
population. These programs should be implemented in a manner that
avoids adverse effects on labor markets, for example, by
gradually phasing out benefits as incomes rise.16 In countries
with a strong preference for providing benefits on a universal
basis and the capacity to raise high levels of revenues in an
efficient manner with broad popular support, means-testing may
not be the socially optimal approach.

? Use tagging where means testing is not
feasible. Tagging links transfers to characteristics that
are strongly correlated with income. The more strongly correlated
are the characteristics with income or other characteristics of
need, the lower the fiscal cost of achieving a given amount of
redistribution. However, since characteristics used as "tags" are
only imperfectly correlated with need, this results in
undercoverage of the poor and leakage of benefits to the
non-poor. Therefore, additional transfer programs may be needed
to protect the excluded poor. In addition, to be effective, tags
should not easily be manipulated by individuals or households and
should be easily verifiable.

? Make income taxation progressive. The
efficiency costs of redistribution can be reduced with tax
schedules that entail higher tax rates for upper-income groups
than for those in the middle of the income
distribution…

? Design indirect taxes to raise revenue in an
efficient manner. Efficiency and costs of administration and
compliance typically point to making broad-based consumption
taxes uniform and avoiding differential rates across goods and
services. These revenues can then help finance progressive
spending. So ineffective are reduced rates in targeting support
to the poor that the impact of eliminating them -and expanding
even moderately progressive spending- can be pro-poor (Keen,
2014). The case for reduced rates is strongest where the capacity
to deliver public transfers to the poor is very weak.

35. Fiscal policy can also promote equality of
opportunity and greater intergenerational mobility. Spending
focused on increasing access to education and health can enhance
social mobility and help break the inter-generational
transmission of poverty and disadvantage. Expanding access for
disadvantaged groups will also enhance the progressivity of
public spending. In addition, improved education and health
outcomes among lower income groups will lower future income
inequality thus reducing the need for redistributive taxes and
transfers.

36. The appropriate mix of direct and indirect
instruments will depend on administrative capacity. The
effective use of direct cash transfers and taxes requires that
the government has access to information on individual incomes
and the administrative capacity to process this information,
collect taxes, and pay transfer benefits to households. When such
capacity is limited, as is the case in many developing economies,
indirect instruments (such as tagging and progressive indirect
taxes) need to be considered as an alternative way to achieve
redistribution. In general, the range of options that are
feasible for emerging economies, especially on the expenditure
side, will be wider than that for low-income
economies.

37. The economic costs of using fiscal policy to
achieve distributive goals should be compared with other policy
instruments, such as labor market regulations. Minimum wages
and employment protection regulations, for example, impose
economic costs on the private sector. The impact of minimum wages
on inequality is ambiguous, given its offsetting effects on wage
dispersion and employment. Even when effective at increasing
wages for low-wage workers, they are a blunt instrument for
addressing inequality, since these benefits will also accrue to
non-poor households with members working at low wages. Given the
uncertainty around the possible effects of wage and employment
regulations, fiscal instruments (such as well-designed in-work
social benefits) are in most cases a superior approach to
achieving redistributive goals in an efficient
manner…

38. The effect of redistributive fiscal policies
should be considered in conjunction with these labor-market
regulations. For example, in-work benefits can increase labor
supply and reduce low-skilled wages, thus shifting some of the
benefit incidence to employers. This, however, can only occur
when minimum wages are relatively low and do not impose a binding
floor…

B. Social Spending

39. This section considers how social expenditure
policies in advanced and developing economies can be reformed to
achieve more efficient redistribution. As seen in earlier
sections, social spending (social protection, education, and
health) is the primary instrument used to achieve redistributive
goals in most countries. This spending can be made more efficient
by improving its targeting and reducing its adverse labor market
effects. The appropriate mix of programs and design features will
vary across advanced and developing economies to reflect
differences in fiscal and administrative capacities. The
discussion focuses first on social protection spending, including
public pensions, family benefits, social assistance, and
unemployment benefits. This is followed by a discussion of the
main in-kind social spending items, education and
health.

40. In advanced economies, appropriately designed
pension reforms can perform an effective redistributive role
while ensuring fiscal sustainability. Pension benefits
account for about two-thirds of social protection spending and,
in the absence of reforms, average pension spending is projected
to rise by an additional 1½ percent of GDP by 2030
(Clements and others, 2012). Pension systems play an important
lifetime consumption smoothing role in protecting the elderly
from a sharp drop in consumption during retirement and account
for over half of the total redistributive impact of social
transfers. At the same time, many economies will need to contain
increases in pension spending in the coming decades to support
fiscal consolidation. The following reform options could
safeguard the redistributive role of pensions while containing
the growth of spending:

? Increasing the effective retirement age.
Gradual increases in the statutory retirement age reduce the need
for other reforms that lower pension benefits and risk increasing
old-age poverty (Shang, 2014), and can also enhance employment
and economic growth. Because lower-income groups tend to have
shorter life expectancy than higher income groups, an increase in
the retirement age results in a proportionally larger reduction
in their lifetime pension benefits. This can be mitigated by
linking pension eligibility to years of contribution instead of a
single statutory retirement age. Increases in the retirement age
should also be accompanied by measures aimed at enhancing the
earning opportunities for those approaching the statutory
retirement age, especially the low skilled whose income potential
can decline significantly as they approach retirement. In some
economies, this may require strengthening of labor regulations
protecting older workers, as well as retraining and adult
education programs. Older workers should be protected fully by
disability pensions where appropriate, and through social
assistance programs to ensure that increases in retirement ages
do not raise poverty rates. In addition, incentives and
opportunities for early retirement (including through disability
benefits) and disincentives to work beyond the statutory
retirement age need to be reduced in many countries, for example,
through concessional contribution rates and in-work
benefits.

? Incorporating pension incomes into a progressive
income tax system. In many countries, pensions enjoy
favorable tax treatment. In such cases, equalizing treatment
across income sources by incorporating all pension benefits into
the standard progressive income tax system can reduce the net
fiscal cost of pension spending while protecting lower-income
groups and lowering inequality. In addition, countries that
subsidize private pensions through tax relief or matching
contributions should consider scaling these subsidies back since
these benefits accrue mostly to high income groups and have
little impact on national savings (European Commission,
2008).

? Making benefit cuts progressive. Many
parametric reforms contain spending pressures by reducing
replacement rates (i.e., the ratio of the average pension benefit
to the average wage) over time. Where possible, these reductions
should be progressive to avoid increases in poverty among the
elderly. However, progressive benefit cuts require larger cuts in
replacement rates for higher income groups, and thus involve a
trade-off between poverty and consumption smoothing objectives
and may exacerbate compliance problems. Where benefit cuts for
lower income groups are unavoidable, it is important that these
groups have access to other social benefits to prevent them from
falling into poverty. Addressing old-age poverty concerns through
a means-tested social pension financed from general revenues
would also allow the earnings-related component to achieve its
broader consumption smoothing objectives more efficiently, and
the financing could use revenue instruments that are more
progressive than payroll taxes…

42. In advanced economies, family benefits can be
made more efficient by greater use of means testing and
strengthening incentives to return to work. On average, in
2005, family benefits decreased the disposable income Gini by
nearly 1.5 percentage points, accounting for nearly
three-quarters of the redistributive impact from total social
assistance spending. These benefits include a range of transfers
such as paid maternal/paternal leave, child allowances, and
childcare benefits. Parental leave schemes, e.g., with a
guarantee to young mothers to return to their previous job within
a certain time period, can help keep young mothers connected to
the labor market. Child benefits facilitate consumption smoothing
over the life-cycle by transferring resources to families with
children since children increase family needs and can also reduce
second-earner incomes. These objectives can be more efficiently
achieved by:

? Means testing and conditioning of child
benefits. High child allowances reduce incentives for women
to enter the labor market with detrimental effects for future
earnings prospects. Linking benefits to labor force participation
(including through childcare subsidies and child tax credits) can
strengthen incentives to enter the labor market and decrease
welfare dependency (Gong and others, 2010; Kalb, 2009;
Elborgh-Woytek and others, 2013). Expanding the role of means
testing and including benefits in taxable income within a
progressive tax schedule, can make child benefits more
progressive and could generate substantial savings given the very
small share of these benefits that is currently means tested
(Figure 11). Means testing also protects the consumption
smoothing role of these benefits since higher income groups have
greater consumption smoothing opportunities.

? Reducing the maximum duration of paid parental
leave benefits. Reducing the maximum duration in countries
where it is very long can increase incentives to return to
employment -Jaumotte (2003) found that parental leave has a
positive effect on female labor supply up to a limit (20 weeks
with full replacement of earnings), above which the marginal
effect of further leave becomes negative. Appropriately designed
parental leave benefits can also reduce poverty and welfare
dependency, since long spells out of the workplace can have
detrimental effects on future earnings potential. Capping leave
benefits where they are earnings related can also increase
benefit progressivity. Although family benefits are much less
common in emerging and low-income economies, they can be
incorporated into targeted cash transfer programs through linking
benefit levels to household composition as in conditional cash
transfer programs (discussed below).

43. Advanced economies could intensify the use of
active labor market programs (ALMPs) and in-work benefits to
address the work disincentives inherent in means-tested
transfers. Guaranteed minimum income programs in many
advanced economies aim to fill the gap between "needs" and
"means". Although these programs may have only a small impact on
inequality, reflecting low aggregate spending, they play a key
role in addressing poverty. However, the withdrawal of benefits
as individuals return to employment creates strong work
disincentives, especially for low-wage workers and families with
children. These disincentives can be reduced through:

? Strict conditioning of eligibility on
participation in ALMPs. In most advanced economies,
continued eligibility for benefits is conditioned on
participation in ALMPs, including personal employment services,
training, job placement, and public employment schemes. Tight
activation measures are especially important for containing
spending and providing incentives to work. The intensity of
activation requirements should increase with unemployment
duration to allow an initial period for job search, followed by
assistance with job placement and access to training
opportunities. Although the strictness of this conditioning has
increased over the last decade, there is still significant room
for improvements in many countries (OECD, 2012).

? Greater use of in-work benefits. Many
economies have adopted a system of in-work benefits that allow
for the gradual withdrawal of benefits as earnings or employment
duration increase (IMF, 2012a). This reduces the net tax on
additional earnings, which can even be negative for low income
groups… When combined with effective ALMPs, they can have
significant beneficial impacts on employment, inequality, and
poverty. Containing the fiscal cost of in-work benefits requires
a more rapid withdrawal of these benefits as incomes increase,
which may create work disincentives further up the income
distribution…

47. Unemployment benefits can be designed to
strengthen incentives to take-up employment. Unemployment
benefits play a key role in advanced economies in protecting
individuals from loss of income due to transitory or structural
unemployment. However, these programs, if not well designed, can
adversely affect employment incentives and outcomes (Meyer, 2002;
Abbring, van den Berg, and van Ours, 2005; OECD, 2006). By
increasing work incentives, efficient benefit design can reduce
spending while also decreasing income inequality, since benefits
are typically below wages. This can be achieved through a number
of design features, including:

? Strict eligibility criteria. Tightening
eligibility rules (e.g., based on past employment and
contributions or mandatory participation in ALMPs) reduces fiscal
cost by incentivizing the return to employment or channeling more
of the unemployed to social assistance with lower
benefits.

? Short duration. Lowering the maximum duration
of benefit eligibility can expedite the return to employment or
the transition to social assistance. About a third of OECD
countries have a maximum duration in excess of 12
months.

? Declining benefit levels. Reducing
replacement rates with unemployment duration provides strong
incentives to return to employment. The desired generosity of
benefits can be achieved through various combinations of benefit
level and duration.

? Individual unemployment savings accounts
(ISAs). Increased use of these accounts could help to reduce
the distortionary impact of contributions by strengthening the
link with benefits received and could also facilitate the
expansion of unemployment insurance schemes in developing
economies with large informal sectors. For example, under this
system, part of the unemployment insurance contribution could be
credited to an individual account on which a person receives
interest (Bovenberg and others, 2012). During a period of
unemployment, individuals can draw money from their account. Once
the account is exhausted, individuals can borrow from the
government at the same interest rate. Individual accounts are
used in a number of emerging economies, including Brazil and
Chile (Hijzen and Venn, 2011).

48. Education reforms in both advanced and developing
economies could focus on improving access by low-income
groups. The regressive benefit incidence of education
spending in developing economies reflects lower access by
low-income groups to higher levels of education (including upper
secondary and tertiary education). In advanced economies,
although education spending as a whole is progressive, tertiary
education spending tends to be regressive. This lack of access to
education in both developing and advanced economies also results
in inequality of opportunity and perpetuates inequality across
generations. A range of spending reforms focused on improving
access can help to enhance the distributional impact of education
spending, including:

? Increasing investment in lower levels of
education. The main driver behind the regressivity (or lower
progressivity) of public education spending is the large share of
the budget allocated to higher levels of education, which are
disproportionally accessed by higher income groups. Lack of
access for lower income groups to higher levels is primarily due
to lack of progress through lower education levels. In developing
economies, this requires improving access to and progression
through primary and lower-secondary education, especially for
girls and in rural areas. In advanced economies, this requires
improving access to, progression through, and performance in
higher-secondary and tertiary education. Increasing access to
early childhood education is required in both advanced and
developing economies, especially given the substantial evidence
that this has a crucial impact on education performance at higher
levels.

? Improvements in the efficiency of education
spending. Increased spending on education at lower levels
should be complemented by efforts to get better results from
existing levels of spending. Inefficiencies in spending are
substantial, including in low-income economies (Gupta and others,
2007; Grigoli, forthcoming).

? Increased cost recovery in tertiary
education. Demand for tertiary education has increased
rapidly in both advanced and developing economies, and often
faster than public financing capabilities. This has resulted in a
decline in the quality of instruction in public institutions and
a growth in private education institutions (Woodhall, 2007; OECD,
2011b). Since much of the benefit from tertiary education accrues
to graduates in the form of higher earnings and other
non-monetary benefits, there is a strong case for financing more
of this cost from tuition fees. Income-contingent student loans
to cover tuition and subsistence costs allow students to begin
paying off their loans once they start earning, ensure that
higher education is free at the point of use, and provides
insurance against the inability to repay due to low future income
(Barr, 2012). Increasing private financing also allows tertiary
education to expand without increasing public
spending.

? Targeted conditional cash assistance. As
discussed above, targeting cash assistance to those with
disadvantaged access to education, and conditioning this
assistance on certain education outcomes, can help to reduce
income barriers to education and incentivize improved education
achievement. This "conditional cash transfer" strategy is being
increasingly used in both advanced and developing economies.
Additional complementary reforms may also be necessary, such as
targeted information campaigns and increasing availability of
shorter term qualification options…

50. In advanced economies, maintaining the access of
the poor to health care services during periods of expenditure
constraint is consistent with efficient redistribution.
Public health care spending is a large share of total public
spending and is projected to rise by almost 3 percentage points
of GDP between 2013 and 2030 (Clements, Coady, and Gupta, 2012;
IMF, 2013b). Health care reforms to curb the growth of spending
will be a necessary component of many countries" fiscal
adjustment plans. Some of these reforms could take the form of an
increase in cost-sharing with the private sector, for example
through increased co-payments, or a reduction in the scope of
services provided by the public sector. These reforms could be
designed to ensure that the poor maintain access to services, for
example, by exempting them from co-payments.

C. Tax Design

51. While the primary contribution of taxation to the
pursuit of equity goals is through financing spending measures,
they can also in themselves efficiently contribute to achieving
redistributive goals. Previous sections have shown that the
mix of direct and indirect tax instruments, as well as the
details of their design and other tax policies, have important
distributional implications. Tax structures were seen to vary
significantly across advanced and developing economies,
reflecting different stages of development and administrative
capacities. The redistributive role of taxation depends on the
progressivity of income-related taxes (including not just
personal income tax (PIT) but also, in particular, means-tested
transfers), the taxation of capital income and wealth that are
concentrated among the better off, and the design of indirect
taxes. This section explores how such tax policies could be
designed, looking in turn at income taxes (on wages, capital
income, and business income), wealth taxes (including those on
property, transactions, and inheritances) and consumption
taxes.

52. Many advanced and developing economies can
achieve their redistributive objectives more efficiently through
increasing the progressivity of their tax and transfer
systems. These include the PIT, social contributions, as well
as negative income taxes and targeted transfer schemes, which
were discussed in the previous section. In developing economies,
the main challenge is to develop a better-functioning PIT system
that helps increase tax ratios. In advanced economies, more
progression can be achieved through reform of PIT rate schedules,
reducing exemptions, and by setting sufficiently high
thresholds.

? Implementing progressive PIT rate structures can
contribute to reducing inequality. The median top PIT rate
(based on a large group of economies across the globe) dropped
from 59 percent in 1980 to 30 percent today (Figure 12). Since
the mid-1990s, 27 countries -especially in Central and Eastern
Europe and Central Asia- have introduced flat tax systems,
usually with a low marginal rate. These regimes are typically
less redistributive than those with stepwise increasing PIT
rates, especially for top incomes. In these and other economies
with relatively low top PIT rates -or in economies where the top
PIT bracket starts at a relatively high level of income 40- there
may be scope for more tax progression at the top. Note, however,
that behavioral distortions impose an upper limit as to how far
these top PIT rates can be increased. For instance, IMF (2013b)
finds that revenue-maximizing PIT rates are probably somewhere
between 50 and 60 percent -and optimal rates probably somewhat
lower than that, depending on the welfare weights assigned to the
rich…

? Raising progressivity also requires
reconsideration of tax deductions. Many economies -including
developing ones- adopt various tax allowances in their PIT
related to children, education, housing, health insurance,
commuting and charitable donations. Some accrue
disproportionately to the rich, such as deductions for mortgage
interest. This is because households with high incomes are more
often homeowners, and tax relief is often granted in the form of
deductions, which are worth more at higher marginal tax rates.
Rationalizing mortgage interest deductibility could complement
steps towards a more progressive tax system and also improve
efficiency, since these deductions create their own distortions
(IMF, 2009). More generally, tax expenditures of this kind often
come along with significant revenue losses. In many countries,
these might not be subject to the same public scrutiny as
ordinary public spending, especially when the governments does
not publish a tax expenditure review. Tax expenditures should
undergo to the same cost-benefit analysis as spending measures.
Some, but not all, tax deductions might well be justified on the
basis of their implications for equity and efficiency, such as
deductions for charitable giving…

? Reforming the PIT threshold can, in some cases,
enhance tax progression. A threshold -either in the form of
a zero-tax bracket, a basic deduction or a general tax credit-
supports tax progression by reducing or eliminating the tax
burden on people with the lowest incomes. Thresholds vary
significantly across economies. In the OECD, the median is
approximately 25 percent of the average wage. Several emerging
and developing economies, however, have no threshold at all
(USAID, 2013) and introducing one could relieve the poorest
households from the obligation (often more in principle than
practice) to pay tax and ease administration. However, the
threshold should not be too high, as this can lead to greatly
reduced revenues. In 16 developing economies, for instance, the
threshold exceeds two times GDP per capita. This contributes to
the small coverage of the PIT and a low revenue yield, thus
undermining redistributive income taxation. Note also that tax
credits are in principle more progressive than tax deductions,
since the value of a credit does not depend on the marginal tax
rate faced by the taxpayer, as is the case with a
deduction.

53. Taxes on capital income can strengthen the
progressivity of the tax system, but high rates can have
substantial efficiency costs. Taxpayers who save and invest
are generally among the better off, so even a proportional tax on
capital income can increase progressivity. Moreover, taxing
capital income is necessary to mitigate arbitrage in the taxation
of entrepreneurial income, as it is often difficult (or even
impossible) to distinguish labor from capital income earned by
the owner-directors of a firm. The latter makes it important to
broadly harmonize the rates of the PIT and the combined burden of
Corporate Income Tax (CIT) and dividend/capital gains taxation.
However, capital income taxes, if too high, can have high
efficiency costs because of their distortionary effects on
savings and investment. Moreover, it can be administratively
difficult to tax capital in light of its mobility, with the
latter leading to ample evasion and avoidance opportunities. In
addition the mobility of capital allows firms to shift a large
share of the burden of these taxes onto labor, as discussed
earlier. To strike the right balance between equity and
efficiency, governments could consider the following
options:

? Tax different types of capital income in a neutral
way. Capital income is generally taxed at both corporate and
personal levels. However, interest is usually deductible for the
CIT (whereas the return to equity is not). In addition, some
investors or investments are PIT-exempt, and different types of
capital income often face different PIT rates. As a result,
interest is often lightly taxed and dividends highly taxed,
especially when compared with the taxation applied to capital
gains. This gives rise to arbitrage and leads to behavioral
changes that erode the capital tax base and create economic
distortions, as well as leading to horizontal inequity -referring
to the unequal taxation of individuals with similar incomes and
assets.

? Consider a lower effective rate on capital income
than labor income. Several economies impose a lower overall
tax rate on capital compared to labor income. For example, this
is found in dual income tax systems where capital income is
separated from labor income and taxed at a uniform and relatively
low rate (Cnossen, 2000; Sorensen, 2005). Some economies also
give targeted relief for the normal return on capital through an
allowance at either the corporate level (such as Belgium and
Italy) or the personal level (such as Norway).

? Adopt withholding taxes, especially if
administration is weak. Taxing capital income at the
individual level can be administratively challenging. This
provides a rationale for taxing these incomes through withholding
at the level of the firm, i.e., the CIT. In countries with weak
administrations, withholding taxes on interest and dividends can,
to some extent, further circumvent administrative difficulties.
Some Latin American countries also impose withholding taxes on
capital gains at source.

? Develop more effective taxation of multinational
business income. Multinationals use a variety of
tax-planning strategies to reduce their global tax liabilities,
leading to profit shifting and base erosion. This poses
challenges to both advanced and developing economies, and is
particularly acute in the latter in light of their greater
reliance on CIT receipts. In light of this global challenge, the
OECD has begun a two-year action plan on "Base Erosion and Profit
Shifting" (BEPS) to address some of these challenges (OECD,
2013). The IMF has work underway, aimed to identify appropriate
policy responses, including unilateral and multilateral
initiatives (IMF, 2013c).

? Automatically exchange information
internationally. This has been announced by the G20 as the
new global standard and can enable economies to more effectively
impose residence-based capital income taxes by mitigating
international tax evasion and avoidance (Keen and Ligthart,
2005). There has been some progress in this regard, led by the
OECD"s Global Forum on Transparency and Information Exchange.
Unilateral measures are also proceeding, notably the U.S. Foreign
Account Tax Compliance Act (FATCA), which envisages penalties for
noncompliance. For developing economies, however, this imposes a
formidable administrative challenge that might have to compete
with more urgent priorities.

54. Some taxes levied on wealth, especially on
immovable property, are also an option for economies seeking more
progressive taxation. Wealth taxes, of various kinds, target
the same underlying base as capital income taxes, namely assets.
They could thus be considered as a potential source of
progressive taxation, especially where taxes on capital incomes
(including on real estate) are low or largely evaded. There are
different types of wealth taxes, such as recurrent taxes on
property or net wealth, transaction taxes, and inheritance and
gift taxes. Over the past decades, revenue from these taxes has
not kept up with the surge in wealth as a share of GDP (see
earlier section) and, as a result, the effective tax rate has
dropped from an average of around 0.9 percent in 1970 to
approximately 0.5 percent today. The prospect of raising
additional revenue from the various types of wealth taxation was
recently discussed in IMF (2013b) and their role in reducing
inequality can be summarized as follows.

? Property taxes are equitable and efficient,
but underutilized in many economies. The average yield of
property taxes in 65 economies (for which data are available) in
the 2000s was around 1 percent of GDP, but in developing
economies it averages only half of that (Bahl and Martinez
Vazquez, 2008). There is considerable scope to exploit this tax
more fully, both as a revenue source and as a redistributive
instrument, although effective implementation will require a
sizable investment in administrative infrastructure, particularly
in developing economies (Norregaard, 2013).

? Recurrent taxes on net wealth generally raise
little revenue. Financial wealth is mobile and taxes hard to
enforce because they are easily evaded. Few advanced economies
today have recurrent taxes on broad measures of net wealth and,
where they exist, revenue is typically low. More effective
exchange of information across economies could help mitigate
evasion and improve the prospect for net wealth taxes to increase
revenue yields. If so, they can have some appeal as an instrument
to reduce wealth inequality and support equality of
opportunity.

? Taxes on inheritances and gifts could play a
useful role in limiting inter-generational inequality, which as
noted earlier is high in many economies, and strengthening
equality of opportunity (Boadway, Chamberlain, and Emmerson,
2010). However, where they exist, rates are generally low,
exemptions and special arrangements widespread, and revenue
yields small. In the OECD, revenue has been declining over time
from 0.35 percent of GDP in 1970 to less than 0.15 percent today.
There may be more potential, which is illustrated by, for
example, France and Belgium where revenue yields are,
respectively, 0.4 and 0.65 percent of GDP.

? Transaction taxes on property and financial
assets are administratively appealing, since transactions
can often be easily observed and administered. However, these
taxes are economically distortive, as they impede otherwise
mutually beneficial trades. Transaction taxes on real estate can
thus reduce labor mobility and raise unemployment. Financial
transaction taxes (FTT) have been much discussed recently,
including in the EU where 11 member states have plans to
introduce a broad-based FTT. Yet, FTTs can have significant
social costs due to cascading effects (tax levied on tax),
increasing costs of capital, encouraging avoidance schemes, and
potentially impeding socially worthwhile transactions. Moreover,
their distributional impact is unclear as the incidence may be
shifted onto consumers (Matheson, 2012).

55. Consumption taxes are generally inferior for
achieving redistributive objectives compared to income-related
taxes and transfers. As shown earlier in the paper, the VAT
is generally regressive in advanced economies -at least when
assessed against current income rather than current consumption-
while it is often found to be progressive in developing economies
(Bird and Gendron, 2007). Also excises tend to bear relatively
more heavily on people with low incomes in advanced economies
(Cnossen, 2005), while this is not generally so in developing
economies. Regarding the design of indirect taxes, the following
recommendations apply.

? Minimize the use of exemptions or reduced VAT
rates. Exemptions or reduced rates on necessities, such as
food or energy, are often used to mitigate the regressive impact
of the VAT in advanced countries, as expenditure shares of these
goods are generally higher for the poor. However, such policies
are blunt redistributive instruments, because the rich generally
spend more in absolute terms on these goods and thus enjoy
significant benefits. Advanced economies usually have access to
better instruments to help the poor and vulnerable, such as
targeted transfers and progressive PIT systems. For instance,
elimination of reduced VAT rates in the United Kingdom, and using
the proceeds to increase social benefits, is found to
significantly reduce inequality while also boosting revenue
(Crawford and others, 2010). In developing countries, exemptions
and special VAT rates should also be minimized, as they erode the
revenue base and reduce the opportunity to finance redistributive
spending. Indeed, even poorly targeted public spending is
generally better for the poor than reduced VAT rates (Keen 2014).
For instance, in Ethiopia, the net impact of a uniform VAT with
the proceeds used for general spending on education and health is
found to have a strong progressive impact (Munoz and Cho, 2004).
However, where capacity constraints prevent spending programs
from reaching the poor, the case for some differentiation in VAT
rates, e.g., for basic food items, can be strong.

? Set a sufficiently high VAT registration
threshold. Small traders bear a significant compliance
burden of the VAT, which they would likely partly pass on to
consumers in the form of higher prices (Ebrill and others, 2001).
A threshold aims to reduce the compliance cost of VAT for small
traders while, at the same time, the revenue foregone is
typically not much higher (or even lower) than the cost of
collection. A threshold can also strengthen the progressivity of
the VAT by reducing the tax on small traders in rural areas where
VAT compliance is particularly problematic. In the Dominican
Republic, for instance, a VAT threshold has been found to have a
strong pro-poor effect (Jenkins, Jenkins, and Kuo,
2006).

? Use specific excises mainly for purposes other
than redistribution. Specific excises on cigarettes,
alcoholic beverages, gambling, and motor fuels should rather be
viewed as corrective tools designed to alter individual behavior
in a way that is socially desirable. For example, greater
taxation of energy (including through carbon taxation) can help
address carbon emissions and various local pollution
externalities and generate a significant amount of revenue. While
low income groups would nevertheless suffer a decline in real
incomes with rising energy prices, mitigating measures targeted
to lower-income groups could be introduced to offset any
undesired effects on income distribution (Metcalf, 2007; Clements
and others, 2013). Special excises on luxury goods, such as
yachts, jewelry or perfumes usefully contribute little to
achieving equity objectives, raise little revenue, and add to
administrative costs, perhaps with the exception of taxes on
motor vehicles.

56. Tariffs have unclear implications for
inequality. Trade tariffs are responsible for a significant
public revenue share in developing economies. In sub-Saharan
Africa, for instance, this is about one quarter. Tariff revenue
is, however, declining in light of trade liberalization. The
distributional impact of tariffs is not quite clear. How the
lowering of tariffs will impact inequality will also depend on
whether and how countries will be able to recover the lost
revenue through other domestic revenue sources (IMF,
2011).

D. Summary

57. Table 1 provides an overview of
fiscal policy measures that can help achieve more efficient
redistribution in advanced and developing
economies.

Fiscal consolidation and inequality

58. The large fiscal consolidations underway in a
number of economies have raised concerns about their potential
impact on inequality. This is reflected in the increased
public support for redistribution since 2008, in particular in
countries where the crisis hit the hardest… Equity
considerations become even more relevant during periods of
consolidation, as they can influence the political sustainability
of fiscal adjustment (Cournède and others, 2013; IMF,
2013b).

A. Advanced Economies

59. Fiscal consolidation can affect income inequality
through its impact on the distribution of both market and
disposable income. Fiscal consolidation typically leads to a
short-run reduction in output and employment, which is often
associated with a decline in the wage share. This tends to
increase market income inequality, given the relatively high
share of wages in the incomes of lower-income groups (Jenkins and
others, 2011). Increasing unemployment also tends to widen wage
inequality, since unskilled wages fall relative to skilled wages
as employers hoard skilled labor (Mukoyama and Sahin, 2006). The
duration and magnitude of these effects depend on the size of
automatic stabilizers, as well as the growth response and its
impact on employment. If multipliers are especially high during
downturns (Jordà and Taylor, 2013), fiscal contraction can
have a strong effect on employment. These effects may be
long-lasting if a prolonged period of slow growth has adverse
effects on the supply side of the economy (Aghion and others,
2009).

60. The composition and pace of fiscal consolidation
influence its impact on inequality. Beyond its effects on
market incomes, fiscal consolidation also affects the level and
composition of taxes and spending and thus disposable incomes.
Income inequality tends to increase the more fiscal adjustment
relies on raising regressive taxes and cutbacks in progressive
pending. Econometric studies find that fiscal consolidations
based on spending cuts worsen inequality by more than
revenue-based ones (Ball and others, 2013; Woo and others, 2013;
Agnello and Sousa, 2012). Frontloaded adjustments can have
especially strong effects on social welfare if they are
implemented when unemployment is already high (Blanchard and
Leigh, 2013).

61. Evidence from recent fiscal consolidation
episodes suggests that a progressive mix of adjustment measures
can significantly help offset the adverse effects of adjustment
on inequality, though the consolidation may still lead to reduced
incomes for the poor in the short term. An analysis of 27
recent adjustment episodes in advanced economies and emerging
Europe suggests that, in about half of these economies, market
income inequality increased during fiscal consolidations.
However, in many cases, the increase was muted by the design of
adjustment measures. In almost two-thirds of the economies,
fiscal measures led to either a decrease in inequality (a decline
in the Gini coefficient for disposable income) or at least partly
offset the effect of a worsening of market inequality (Figure
13).

Note: An increase in Gini coefficient indicates an
increase in inequality. The Gini coefficient for market income is
estimated by Euromod based on post-tax income survey data by
Eurostat and simulated figures for taxes, using the Euromod
micro-simulation model. *Indicates that data for disposable
income refer to 2007–11.

62. A more detailed analysis of fiscal measures
suggests that both revenue and spending measures can be designed
in ways that reduce their burden on lower-income groups.
Among the economies where detailed data are available,
simulations of the impact of these measures on disposable income
show that five countries (Greece, Latvia, Portugal, Romania, and
Spain) implemented progressive measures between 2008 and 2012,
with households in the richest quantiles bearing most of the
adjustment cost (Figure 14). In other countries, the impact of
the adjustment tended to be less redistributive and smaller in
size (Italy and the United Kingdom). In contrast, for two
economies (Lithuania and Estonia), those in the poorest deciles
suffered relatively larger reductions of their income. In Greece,
there was also a larger drop in incomes of the poorest ten
percent of the population, but the overall effect was
progressive, as the second to fourth decile experienced
relatively low decreases in their incomes. The simulated effects
of the fiscal consolidation measures on the Gini for disposable
income are shown in Figure 15. In particular, the difference
(represented by the bars in the chart) of the Gini coefficient
before and after the implementation of the measures (represented
by the triangles and squares, respectively) suggest that fiscal
measures have prevented an increase in inequality induced by the
market in seven out of nine countries. In particular, the
analysis suggests the following:

? Public sector wage reductions were progressive, as
public sector employees were mostly skilled and educated workers
and a large part of the middle-upper class, and because the cuts
were generally structured to have a greater impact on higher
income workers;

? Cuts in untargeted benefits were largely progressive,
while reductions in means-tested benefits were
regressive;

? Proportional reductions in pensions across all
beneficiaries proved to be strongly regressive, as pensioners in
the lower-middle income groups lost a greater share of their
total income. In economies where pension freezes and/or cuts were
targeted to high pensions, the overall effect of these measures
was progressive;

? Increases in income tax and social contributions
proved to be mostly progressive. However, some features of
changes in the income tax, such as decreases in the tax-free
threshold, reduced the progressivity of income taxation;
and

? Increases in VAT rates were regressive, with the
relative degree of regressivity depending on the relationship
between the VAT structure and consumption patterns of different
income groups.

63. This analysis suggests that both expenditure- and
revenue-based fiscal adjustments can be designed to mitigate the
adverse effects on inequality. While the appropriate pace of
fiscal adjustment depends on the state of the economy, the state
of public finances, and the extent of market pressures, the
progressivity of consolidations depends on the specific design of
measures. Governments could consider protecting the most
progressive and efficient redistributive spending during fiscal
adjustment and improve targeting to minimize the effects of
adjustment on inequality. Broadening the scope of spending cuts
to reducing subsidies, military spending, and public sector wages
can reduce the need for cuts in social transfers. Greater
reliance on progressive revenue measures can also avoid the need
for large cuts in social transfers, though this room may be
limited if taxes are already high (Baldacci, Gupta, and
Mulas-Granados, 2012). Progressive tax measures could also be
considered, such as reductions in regressive tax expenditures and
greater taxation of wealth and property. Finally, expanding
active labor markets programs, such as job-search support,
targeted wage subsidies, and training programs, can help
accelerate the decline in unemployment as economic growth
resumes…

Appendix II. Recent Fiscal
Consolidations and Income Inequality

The extent and composition of recent fiscal
consolidation packages implemented in nine European countries
since the global financial crisis differ substantially across
economies. The impact of fiscal consolidation on overall
disposable income ranged from 1 percent to more than 11 percent,
contributing to reductions in living standards of the population.
The adopted fiscal measures varied across countries (Appendix
Figure 1). Public sector pay reductions were significant in
Greece, Latvia, Portugal, Romania, and Spain. Public pension cuts
or a freeze in benefits were prevalent in Romania, Portugal, and
to a lesser extent, in Spain. Changes in pension indexation were
adopted in Estonia. Reductions in means-tested benefits were
large in Portugal and the United Kingdom, while reductions in
untargeted benefits were sizeable in Lithuania and Latvia. Income
tax hikes played a major role in Greece (with an important
base-broadening component) and Spain, and increases in worker
social insurance contributions played a role in Latvia and
Estonia. Increases in VAT rates were adopted in all nine
countries…

The overall distributional outcome
reflects the composition and design of the consolidation
package. Micro-simulation studies indicate that these fiscal
adjustments relied on progressive measures. These studies focus
exclusively on the impact of spending and tax consolidation
measures on household disposable income and consumption, and do
not assess the impact of these measures on market income (Callan
and others, 2012; Avram and others, 2013; Koutsampelas and
Polycarpu, 2013). For a subset of nine countries, studies
simulate the impact on disposable income of specific
consolidation measures adopted during the period 2008-12
(Appendix Figure 2).

The results suggest that:

? The overall progressivity of the consolidation package
in Greece has been driven by progressive public sector
pay cuts, pension cuts, and income taxation. Public sector wages
were capped, special allowances for civil servants reduced, and
the 13th and 14th salaries abolished for high earning workers.
The poorest 10 percent of the population were hit relatively
harder by the reform of the income tax, which reduced the
tax-free threshold from EUR 12,000 to EUR 5,000 in
2011.

? The progressive incidence in Spain was also
due to public sector pay cuts and changes in income taxation,
although the poorest 10 percent of households were relatively
harder hit by the 5 percentage point cumulative VAT increases
imposed over 2010 and 2012. The public sector pay cut averaged 5
percent but increased with wage up to 9.7 percent, and was
followed by a freeze and the elimination of the 14th month of
pay.

? Moderately progressive public sector wage and pension
cuts also drove the overall mildly progressive effect of
consolidation in Italy, although the scale of the
household average income loss was very limited due to a narrow
targeting of the implemented measures, which by design only
affected a small part of the population. Public sector wages
above EUR 90,000 and EUR 150,000 per year were cut by 5 and 10
percent respectively.

? In Portugal, the overall progressive
incidence was due to progressive cuts in public wages and
pensions, which offset the regressive cuts in means-tested social
transfers which negatively affected households in the bottom
decile. Public sector pay cuts increased with wage to a maximum
of 10 percent, and included the suspension of the 13th and 14th
months of pay in 2012. Benefit reductions included a decrease of
the amount and tightening of the eligibility conditions for
family benefits. The suspension of the 13th and 14th months of
pay was reversed in 2013 (after the period under consideration in
the analysis).

? The moderately regressive path observed in
Lithuania was the result of slightly progressive public
sector pay cuts -involving basic wage rates, coefficients, and
bonuses- and cuts to untargeted benefits.

? In Romania, the overall incidence was
progressive due to public sector pay cuts, real pension
reductions for middle-class and rich pensioners, and means-tested
benefits.

? Progressive reductions in public sector pay, which
decreased the average wage by about 10.5 percent, and non-pension
benefits more than offset regressive cuts in public pensions and
drove the overall progressivity in Latvia.

? The overall regressive effect observed in
Estonia, on the other hand, was driven by a change in
the indexation of public pensions, although means-tested social
assistance lessened the impact on the incomes of the
poorest.

? In the United Kingdom, the overall incidence
was progressive, due to higher taxes, especially on the richest 1
percent of the population.

(Información de Hemeroteca)

– El FMI lanza propuestas para reducir la desigualdad
económica (The Wall Street Journal –
13/3/14)

(Por Ian Talley)

Washington.- La principal institución
económica del mundo está inmersa en una
campaña para revertir la creciente brecha entre los ricos
y los pobres, advirtiendo que la creciente desigualdad de
ingresos está lastrando el crecimiento económico
mundial y atizando la inestabilidad política.

El Fondo Monetario Internacional
publicó el jueves un documento de 67 páginas en el
que explica cómo pueden usar sus 188 miembros la
política fiscal y el gasto público para atajar la
creciente disparidad entre los que tienen y los que no. El
segundo máximo responsable del fondo, David Lipton,
explicará más en detalle el caso en un discurso en
el que hablará sobre cómo afronta el tema la
organización. Se ha tomado esta decisión
después de que la directora gerente del FMI, Christine
Lagarde, y algunos de los miembros más poderosos del fondo
hayan advertido sobre la amenaza que supone la desigualdad para
las perspectivas económicas a largo plazo.

El FMI aboga por subir los impuestos y
redistribuir la riqueza, entre otras medidas, para reducir la
brecha entre ricos y pobres.

La inestabilidad política que se ha extendido en
los últimos años por Egipto, Nigeria, Ucrania y
Venezuela pone de manifiesto la importancia de las desigualdades
económicas. En todos estos países, la disparidad de
ingresos y la mala gestión económica han
contribuido al incremento de la inestabilidad. Un problema que se
ha visto exacerbado en Estados Unidos y Europa por las crisis
financieras.

El FMI confía en que se inicien debates
públicos sobre las políticas de protección
de los pobres y redistribución de la riqueza. Los
empleados del fondo han comenzado a poner en duda teorías
económicas tradicionales sobre la desigualdad, como la
asunción desde hace cuatro décadas de que la
redistribución de la riqueza supone un lastre para el
crecimiento.

El FMI asegura que la desigualdad en varios
países avanzados, como Estados Unidos, ha vuelto a niveles
que no se registraban desde antes de la Gran Depresión de
la década de 1930.

El último documento del fondo no prescribe
medidas específicas para países específicos.
Pero ofrece varias propuestas que probablemente serán muy
controvertidas. Principalmente, el FMI señala que muchos
países avanzados y en vías de desarrollo pueden
reducir la desigualdad aplicando impuestos a la propiedad de una
forma más agresiva e impuestos "progresivos" sobre la
renta personal que sean más elevados cuanto mayor sea la
renta.

Si los países en vías de desarrollo
amplían el porcentaje de ingresos que gravan, exigiendo
más a los ciudadanos con mayores rentas, los estados
podrían gastar más en educación y servicios
de salud, dos programas que, entre otros, pueden acabar con la
pobreza generacional y que aumentan los ingresos, lo que a su vez
alimenta las perspectivas de crecimiento económico a
más largo plazo.

Sin embargo, los ingresos son sólo la mitad de la
ecuación. Incluso cuando hay ingresos para invertirlos en
gasto social, a menudo este gasto está mal estructurado,
según el FMI. Una de las mayores cargas económicas
que sufren muchos países emergentes son los subsidios a
los alimentos y los combustibles.

Los gobiernos de Venezuela, Ucrania y Egipto han
dependido mucho de los subsidios estatales y los países
están cerca de la quiebra, ya que las arcas estatales no
pudieron afrontar los crecientes costes, pese a las presiones
políticas para mantenerlos.

El FMI agregó que los países en
vías de desarrollo deberían unificar y ampliar sus
programas de asistencia social, dirigir mejor sus subvenciones
hacia los más pobres y vincular las transferencias de
dinero estatal a los más vulnerables a servicios de salud
y educación.

– Las cuatro claves del FMI para frenar la
desaparición de la clase media (El Economista –
13/3/14)